KURT B.

DEL ROSARIO
ACCA109

Chapter 13

1. What is meant by the control environment?

- Control Environment includes the attitude, awareness and actions of and
management and those charged with governance concerning the entity’s internal
control and its importance in the entity. Control Environment set the tone of an
organization, influencing the control consciousness of its people, It is the foundation
for effective Internal Control, providing disciplines and structures. Generally, this is
answer the question what message does the management sends to its employees
regarding Internal Control.
- is the set of standards, processes, and structures that provide the basis
for carrying out internal control across the organization. The board of
directors and senior management establish the tone at the top
regarding the importance of internal control including expected
standards of conduct.

2. What is the relationship among the five components of internal control?

- Every components of internal control plays an important role in having an effective

internal control. The absence of one may cause inefficient internal control. The first
component of internal control, is the control environment, this component is very
important because this serves as the foundation of internal control, Control
Environment sets the tone on the top of the organization and provides discipline and
structures. For example, if the company is pushing its employees to have unrealistic
sales, therefore the company might have a weak internal control and lead to
dishonesty of employees.
- The next component is risk assessment, risks are crucial to every organization.
Management should adopt policies and procedures that are designed to identify and
analyse the risk affecting the entity’s business and to take appropriate action to
manage those risk, Risk Assessment is also important in internal control because in
this component, the management identifies possible risk that will affect the company.
To manage this risks, the company will establish policies and procedures. Having
risk assessment strengthens the effectiveness of internal control.
KURT B. DEL ROSARIO
ACCA109

- The next component is control activities, these are the actual policies and procedures
that ensure the management directives are carried out. setting a control activity
strengthens the internal control because having policies and procedures will lessen
the opportunity for fraud and errors. One important factor of control activities is
Segregation of duties which is about different people should authorize transactions,
have the custody of the asset and performing comparisons or reconciliation of the
asset, This is to lessen fraud that a person could do if he/she is entrusted with many
duties,
- The fourth component of the internal control is information and communicatio
n. It involves recognizing and transmitting sensitive information in a timely a
manner that helps employees to fulfill their obligations. Timely financial 
reporting, for example, can help management to recognize irregularities in its 
operations such as declines in margins, large losses and other and the
management can take corrective actions. With this, internal controls can be
strengthened.
- The last part is monitoring, which when it comes to internal control is a key
element of management responsibilities. Top management is responsible for
monitoring all controls and assessing whether operations are running as
planned. If controls do not work efficiently, then it is the duty of management
to change such controls. Monitoring is important in strengthening Internal
control because this can improve policies and procedures by continuously
monitoring the controls
- Generally, each components plays a crucial role in Internal control, once this are
implemented effectively, this can help achieve the entity’s objectives. The
cumulative effect of these components strengthens the overall internal control of the
company,
2. The separation of operational responsibility from record keeping is meant to prevent
different types of misstatements than the separation of the custody of assets from
accounting. Explain the difference in the purposes of these two types of separation of duties.
- The distinction between these two forms of separation of duties is that separation of
operational responsibility from record keeping is intended to minimize the possibility
of operational staff biasing their performance results by improperly documenting
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ACCA109

details while separating the custody of assets from accounting for these assets is
intended to avoid misappropriation of assets. when a person performs both function
there is a higher possibility that the person may take advantage or commit fraudulent
acts.
3. For each of the following, give an example of a physical control the client can use to protect
the asset or record:
a. Petty cash –Petty cash should be kept in a safe place and it should be managed by one
person and he should not be doing other functions like reconciling petty cash to lessen
fraud.
b. Cash received by retails clerks – the cash received should be placed in a cash register to
record cash receipts and there should be a daily monitoring of cash inflow having an
Information processing system could help to strengthen controls with cash receipts.
c. Accounts receivable records- the records should be kept in a safe place, it should have
duplicated computerize copies in case of emergency. The records should be entrusted
with one person but the A/R Collector must not have access to this records to avoid fraud.
d. Raw material inventory- Should be kept in a locked storeroom and only authorize
employees should have access to that room and also it is important to have inventory
register to reconcile the amount of inventories in the storeroom and in the storeroom.
Having CCTV camera’s is also helpful.
e. Perishable tools should be kept in a locked storeroom and only trusted employees should
have access to that room.
f. Manufacturing equipment- should be placed in an area protected by burglar alarms ,
fire alarms, and CCTV camera and kept locked when not in use to avoid fraud.
g. Marketable securities should be stored in a safety deposit vault.